Introduction
As of this year, the economic consequences of the ongoing trade war have not materialized with the full intensity initially feared. The blow to Mexican exports has been softened by various suspensions and exceptions applied to tariffs introduced by the Trump administration during its second term.
Mitigating Tariff Impact
American companies have prioritized advance sourcing as a strategy to partially mitigate the tariff impact on their costs. This approach is reflected in the record U.S. trade deficits during the first months of the year, resulting in resilient Mexican exports.
Anticipatory Effects and Future Challenges
The anticipatory effects may continue to fuel short-term dynamics in Mexico, possibly leading to an increase in remittances due to the tax proposed in the “Big Beautiful Bill” recently passed by the U.S. government.
However, not all indicators have remained unscathed. Manufacturing employment has started to decline, with five consecutive monthly interannual contractions in 2025—a situation only previously observed during the crises of 2001, 2008, and 2020.
Mixed Economic Indicators
The INEGI monthly economic activity indicator for April surprised positively (+0.5% monthly), but with a strong contraction in construction (-2%). This sector accounts for 6% of GDP and has been on a downward trajectory since 2014.
The tariff delay has given Mexico’s economy some breathing room to absorb the impact, but tailwinds remain.
Accelerated T-MEC Review
Both countries have clearly expressed their interest in accelerating the T-MEC review, aiming to initiate discussions in the second half of 2025 instead of mid-2026 as initially planned.
Lessons from Vietnam Trade Agreement
The recently established treatment with Vietnam provides insights into the parameters guiding these negotiations. It’s no secret that much of Vietnam’s extraordinary growth in recent years is due to the transit of Chinese-origin products. The tariff on Chinese content in Vietnamese exports will double from 20% to 40%
Although the transit phenomenon is of much smaller scale in Mexico, restrictions on its integration into global supply chains are greater. To qualify for T-MEC preferential treatment and avoid burdensome tariffs, Mexican products must adhere to origin rules.
Stringent Automotive Industry Rules
In the automotive industry, these rules imply that 75% of a product’s added value and 70% of steel and aluminum content must be North American origin, with 40-45% of labor value coming from workers earning at least $16 per hour.
Despite this, the U.S. and Canada’s share in Mexican imports has decreased from 47% to 41% since the T-MEC’s introduction in 2020.
Nearshoring Model and Supply Chain Integration
While Mexico’s demand is entirely oriented towards the U.S., ensuring production and investment levels to meet this demand requires sourcing goods produced outside North America.
The conclusion is that maintaining the Nearshoring model would imply much greater vertical integration towards earlier links in the supply chain. The feasibility of such a strategy depends heavily on the tariff balance determined this year: if the differential with Asia and Europe is strong enough, it may be advantageous for automakers to transfer certain component production to Mexico.
Key Questions and Answers
- Q: How has the trade war affected Mexico’s economy so far?
A: The economic consequences of the trade war have not materialized with full intensity. Tariffs on Mexican exports have been softened by suspensions and exceptions. - Q: How have American companies responded to tariffs?
A: American companies have prioritized advance sourcing to mitigate the tariff impact on their costs. - Q: What are the mixed economic indicators in Mexico?
A: Manufacturing employment has started to decline, with five consecutive monthly interannual contractions in 2025. - Q: How does the recent Vietnam trade agreement inform Mexico-U.S. negotiations?
A: The agreement with Vietnam indicates parameters for Mexico-U.S. negotiations, such as increased tariffs on Chinese content in Vietnamese exports. - Q: What does maintaining the Nearshoring model imply for supply chain integration?
A: Maintaining the Nearshoring model would require greater vertical integration into earlier supply chain links, depending on the tariff balance determined this year.
